February 2nd 2020

Market Review

U.S. stocks finished another week with losses. The Dow Jones Industrial Average lost 2.5% over the week to 28,256.03. The S&P 500 booked a weekly loss of 2.1% to close at 3,225.52. On Friday, both the Dow and S&P 500 recorded their biggest one day falls since August. The Nasdaq shed 1.8 percent for the week to end at 9,150.94. After all three benchmark indexes saw record highs earlier in January, for the year to date the Dow is now down 1% and the S&P 500 is down 0.2%, while the technology heavy Nasdaq index is still up 2%. Most key S&P sectors ended in negative territory for the week, led by energy. The utilities sector was the only gainer. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped to 18.8.

Strategy Review

In our last week’s comment, we highlighted the fact that the market looked vulnerable for further consolidation work into early February. This was based on the fact that the tape condition of the market looked too supportive to justify a stronger correction and a way too weak to trigger another sustainable rally on recent levels. Above all, we said that the option market remained to complacent, although the latest consolidation period had already started to have its designated impact on short-term optimism. As a result, we expected to see further consolidation work in combination with increased selling pressure ahead. We advised our members not to panic (even if we saw some nasty down-days), since the underlying tone remained supportive back then. After the S&P 500 shed nearly 2% on Friday, the big question is if this case is still intact or if the ongoing consolidation period transformed into a more corrective set-up? To identify a corrective consolidation, the underlying tape structure remains as always key area of focus. Because under normal circumstances, a consolidation period is considered to be a healthy one as long as short-term to mid-term market breadth remains supportive or is at least forming some bullish divergences in quite bearish territory. In such a case, any short-term oriented trend break can be ignored as the market is just taking a (healthy) breather within an ongoing uptrend. Otherwise, such a consolidation period forces the market into a typical top building process, which is then of course just the harbinger of a more significant pullback/correction.

Short-Term Technical Condition

Obviously, the expected consolidation period caused a stronger deterioration within our short-term oriented indicators last week. To be more precise, the S&P 500 closed 40 points below the bearish threshold from the Trend Trader Index on Friday. Consequently, the pure short-term oriented price trend (time-series momentum) of the market remains bearish as long as the S&P 500 does not close above 3,291 (upper threshold from the Trend Trader Index). Nevertheless, from a pure structural point of view, the short-term oriented price trend of the market has not completely broken yet, as both envelope lines of the Trend Trader Index are still holding up quite well. As a result, the recent trend-break can be categorized as non-sustainable so far (at least from a pure price point of view). The situation looks quite different if we analyze the underlying momentum of this short-term oriented price trend. The Modified MACD widened its bearish gap, indicating further selling pressure ahead. Basically, the same is true if we focus on the Advance-/Decline 20 Day Momentum Indicator as its gauge slightly passed the bearish threshold last week and has, therefore, confirmed the latest weaknesses. As already mentioned above, the short-term oriented trend of the market is only giving a limited picture about the current condition of the market as it is not unusual that some/all of our short-term oriented trend indicators tend to deteriorate after a strong wash-out day. In such a situation, short- to mid-term market breadth will give guidance if the current short-term oriented bearish trend will lead to further stronger losses or if was only caused by a handful of a few heavy weighted stocks in the index.

Unfortunately, most of our short-term oriented tape indicators did not show any stronger signs of improvements or  last week. Especially, our Modified McClellan Oscillator Daily and the Modified McClellan Volume Oscillator Daily continued to show major signs of exhaustion as they plummeted significantly for the week. This tells us that the underlying momentum of advancing volume and advancing stocks is outright negative at the moment and has, therefore, not shown any signs of positive divergences yet. Basically, the same is true if we focus on the percentage of stocks which are trading above their short-term oriented moving averages (20/50). There we can see that only 25/37 percent of all NYSE listed stocks remain in a short-term oriented price-driven uptrend. This is telling us that the latest selling pressure was quite broad based in nature and, hence, not only the result from a few heavy weights stocks in the index. Although this looks like a quite serious tape signal, the gauge from the 20 SMA is about to hit oversold conditions soon. More importantly, we can see that the market internals still remain quite robust (given the latest circumstances) as our NYSE New HighsNew Lows Indicator was holding up extremely well. Examining this indicator reveals that the number of stocks hitting a fresh yearly high was definitely much higher (even on Friday) as the number of stocks which were pushed to a new yearly low. In other words, we have not seen a bearish spike in new lows (in combination with a strong decrease in new highs) yet – a fact which always occurs if a consolidation period/smaller pullback transforms into a more corrective set-up. Consequently, it was not a big surprise at all that the High-/Low-Index Daily was holding up quite well and remains, therefore, quite bullish. As a matter of fact, the recent selling pressure can be still described as supportive although the degree of confidence slightly decreased on high levels last week.

Unchanged compared to last week, the most important signals are still coming from the contrarian side. There we can see that the latest washout-day on Friday continued to cause increased fear in the option market. Consequently, most of our option based indicators (Daily Put-/Call Ratio All CBOE Options, All CBOE Options Put-/Call Ratio Oscillator, Equity Options Put-/Call Ratio Oscillator and the WSC Put-/Volume Ratio) turned quite neutral or even bullish last week. Although the z-score from the Daily Put-/Call Ratio All CBOE Options turned slightly neutral last week, a bit more fear is needed to force the market into an intermediate low. As a consequence, further selling pressure can be expected (although we think we might not be too far away from an important low). This is mainly due to the fact that the Smart Money Flow Index formed an extremely bullish divergence on Friday, whereas from a pure seasonal point of view (Presidential Cycle), the market should hit an important intermediate low next week. The main reason, why we mention intermediate and not final low is due to the fact that the Presidential Cycle is suggesting a relieve rally into April before further major troubles might be due. This view would coincide with the fact that we saw two Hindenburg Omen last week. As a matter of fact, the market remains at risk to face a stronger pullback within the next 30 days. If we see several consecutive Hindenburg Omen, the counter starts at zero again. Consequently, we would not be surprised to see further signals down the road (even if the market is getting back on track).

Mid-Term Technical Condition

Another reason, why we believe that the ongoing consolidation period is still constructive in its nature is based on the fact that the Global Futures Trend Index is still trading far above its 60% threshold. As already mentioned a couple of times, as long as we do not see readings below that important threshold in combination with outright weak/bearish readings in mid-term oriented market breadth, any consolidation period has still a clear bullish character. Consequently, the recent consolidation period is still supportive in its nature. This can be also seen if we focus on the WSC Sector Momentum Indicator, which keeps trading at solid bullish levels. This is telling us that from a pure price point of view, the mid-term oriented uptrend of the market remains well intact. This can be also seen if we examine our Sector Heat Map as the momentum score of all sectors (except energy at 0%) keeps trading above the one from riskless money market (currently at 9%). Subsequently, it might be a bit too early to panic right now.

Like in the previous week, the current mid-term oriented up-trend of the market is widely confirmed by mid-term oriented market breadth, although it once again showed signs of weaknesses. First of all, our advance-decline indicators (Advance-/Decline Line Daily, Advance-/Decline Line Weekly and the Advance-/Decline Volume Line) were holding up quite well compared to the broad market (especially the Advance-/Decline Volume Line). Moreover, mid-term oriented advancing issues as well as mid-term oriented up-volume are still trading above their bearish counterparts (although they once again lost some steam last week). And as long as both indicators remain bullish (in combination with a reading above 60% within our Global Futures Trend Index) it is definitely a bit too early to pull the trigger. Another encouraging signal is coming from the Modified McClellan Oscillator Weekly which remains bullish (although it narrowed its bullish gap). This indicates that the underlying momentum of advancing stocks on a mid-term time horizon still remains positive. The only weak signal is coming from the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150). Both gauges dropped and the SMA 100 closed below is bullish threshold. All in all, the above facts are telling us that it might be a bit too early to pull the trigger yet as the current weaknesses can be still described as healthy in its nature (at least for now).

Long-Term Technical Condition

On a very long-time frame, the technical picture of the market remains bullish at the moment, and therefore, we do not think that a stronger correction should lead to a new bear market. Although the WSC Global Momentum dropped for the week, it is still trading in bullish territory and indicates that currently 58% of 35 local equity markets all around the world (which are covered from our Global ETF Momentum Heat Map) are still in a long-term oriented up-trend. Moreover, it was good to see that the gauge from the Global Futures Long Term Trend Index increased significantly last week. This can be also monitored if we focus on the Global Relative Strength Index, as the relative strength of all risky markets was holding up quite well, indicating that it might be a bit too early to panic right now. Nevertheless, we can also see some small exhaustions in long-term market breadth, as the readings from our entire long-term oriented tape indicators (High-/Low Index Weekly, Modified McClellan Volume Oscillator Weekly and the SMA 200) slightly weakened last week. This might be another piece of evidence that the market looks vulnerable on a short- to mid-term time horizon.

Model Portfolios

As it was the last Friday of the month, we received a new allocation advice from the WSC All Weather Portfolio, the WSC Inflation Proof Retirement Portfolio and the WSC Dynamic Variance Portfolio. The allocation of the WSC Sector Rotation Strategy remains unchanged.

Bottom Line

Our key call remains unchanged compared to last week. With quite stretched signals within our short-term oriented indicators, the market is poisoned for further consolidation into early February. However, the current consolidation can be still categorized as non-corrective/bullish biased, as most of our mid- to long-term oriented indicators remain quite bullish/supportive at the moment. A fact, which can be also seen if we focus on our Big Picture Indicator, which is moving around within its bullish-consolidation quadrant.  Thus, our strategic bullish outlook remains unchanged and, therefore, we think it is still a way too early for our conservative members to take the chips from the table. Moreover, we can see that the current consolidation period has its designated impact on short-term optimism, which could act as another strong catalyst for a short-term relieve rally. However, that does not imply that the market will take off immediately (as still some pain is needed) but the chances for an impulsive break-out are definitely increasing (at least form a pure contrarian point of view). Therefore, we would advise our aggressive short-term traders to use close stops.

Stay tuned!